Moment of truth for ECB on new round of stimulus

Last Thursday at 3:02 AM

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After 2019 opened with hopes the European Central Bank could begin "normalising" policy after years of buttressing the eurozone, governors appear set for a fresh unconventional turn Thursday, under pressure from financial markets.

The measures expected to unveiled by ECB chief Mario Draghi are likely to set the bank's stand for months or even years despite the fact he will hand over the reins to Christine Lagarde next month

AFP

Deeper negative interest rates, a new bond-buying programme and relief for struggling banks are all on the agenda, producing a rarely-seen level of public division on the bank's governing council.

President Mario Draghi, who will yield his seat to departing International Monetary Fund chairwoman Christine Lagarde on October 31, could yet tie her hands for months -- or years -- to come with his final moves.

Over the summer, Draghi stoked confidence in an upcoming policy package.

In July he reiterated the "possibility of actions in the future, if there is no improvement" in economic conditions.

"This might be his last stunt, but we expect Mario Draghi to conquer the barricades once again" around the council table, ING bank economist Carsten Brzeski said.

"The costs of waiting or only delivering parts of a big package and then trying to get ahead of the curve at a later stage will be higher," he added.

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Central bankers have for years failed to hit their inflation target of just below 2.0 percent, despite unprecedented interventions -- peaking in a 2.6-trillion-euro ($2.9-trillion) bond-buying scheme from 2015-18 and negative rates on banks' deposits.

Now US-led trade wars, weakness in emerging markets and the risk of a no-deal Brexit are slowing growth.

In the second quarter, economic activity in the eurozone expanded by just 0.2 percent compared with January-March, while annual inflation fell to 1.0 percent in July. Its leading economy, Germany, is forecast to slide into recession in the third quarter.

New ECB staff growth and inflation forecasts, expected to be lower than in June, will provide fodder for the doves' arguments at this week's meeting.

The June outlook already trimmed predictions for both measures, with prices expected to grow just 1.6 percent in 2021 -- far short of the target.

Whatever the decision, policymakers will tweak their "forward guidance" on future policy to set markets' expectations for how long low interest rates will last.

If the ECB launches asset purchases, it will likely tie any rate hike to their coming to an end.

To quiet inevitable grumbles from banks about low rates, many analysts expect the ECB to introduce a "tiering" system exempting some deposits from the charges, which amount to more than seven billion euros per year.